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Monday, March 2, 2015

Surviving In New Markets: Economic Affinity And The Role of Power

Starting up a new business means you're the plankton in the shark tank. So how do you go about not becoming dinner?

Entering new and hostile markets can be achieved, and a permanent footprint established, with the right deployment of resources.

If power is most effective when coalesced, it follows that economic power is similarly most effective when combined among a group.

When that group has an additional tie, such as an ethnic or shared experience affinity such as church membership or the trauma of wartime military service, the economic power can be very formidable indeed. This breeds the theory that collective economic power exercised by an inclusive, self-defining group (on a criterion or basis of its choosing) can be effective.

If you're already thinking this sounds remotely like a boycott, and hence sort of anti-competitive and hence illegal, hold that thought.

It is useful to remember that this elementary exercise of economic power is first and most commonly used, not to stifle competition. Collective group power is, at its core, not so much self-interest as it is self-protection against hostile larger groups with more power. Outnumbered or poorly-established groups such as minority groups or newcomers to an industry or market, often seek to combine their power in a form of mutual self-interest. This may manifest itself in the creation of small chambers of commerce or local "business improvement districts," or anything that can convey strength in numbers to more powerful entities (i.e., government, larger competitors, suppliers, etc.).

Such collective action can have other effects in preserving, enhancing and concentrating the wealth of its members, and affecting the behavior of outsiders, third parties not yet in the group, through a risk-reward system that conditions admission on certain behavior and discourages unwanted behavior through expulsion and punishment.

When does such activity transform from self-protective into anti-competitive?

It is useful (and necessary) to look at guidance from regulators. The apparent focus of the Federal Trade Commission is on preserving competition. Here is some of what the FTC has to say on the matter:

"In order to compete in modern markets, competitors sometimes need to collaborate. Competitive forces are driving firms toward complex collaborations to achieve goals such as expanding into foreign markets, funding expensive innovation efforts, and lowering production and other costs.

In today's marketplace, competitors interact in many ways, through trade associations, professional groups, joint ventures, standard-setting organizations, and other industry groups. Such dealings often are not only competitively benign but procompetitive."

But wait, there is more:

"But there are antitrust risks when competitors interact to such a degree that they are no longer acting independently, or when collaborating gives competitors the ability to wield market power together." (Emphasis added.)

And finally, as if to emphasize the phrase I've highlighted in bold text:

"Any company may, on its own, refuse to do business with another firm, but an agreement among competitors not to do business with targeted individuals or businesses may be an illegal boycott, especially if the group of competitors working together has market power."

(Again, emphasis is mine, in bold.)

The lesson from these statements is that startups and smaller companies have plenty of room to use their modest power to survive and then establish a foothold in a market. Once companies become established and arguably dominant, whether individually or collectively, that is a different story altogether.

There is plenty of maneuverability for young companies and smaller companies which do not have "market power" and thus need the protection of numbers from other "players" with common interests. This is where the affinity of shared interests, and of shared values, economic and otherwise, can be critical in establishing loyalty among customers, vendors and even some other market participants whose leaders recognize that today's competitor may be tomorrow's joint venturer.

The message: Affinities based on shared interests and shared values can be very useful to an up-and-coming business. One key is learning to recognize the affinities. The second key is to use them.

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